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Light oil producers see the, err, light

Also: Is it 1987 again? 2007 redux? Some thoughts on trying to use the past to tell the future

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Apr 22, 2014

by Max Fawcett

While much of the attention in recent months has been on the difficulties that Canadian heavy oil producers have faced in getting their product to market at a fair price, light oil producers haven’t exactly had a great time of it either. The massive flood of light sweet crude coming out of the Dakota Bakken, and the inability of existing pipeline infrastructure to get it to market, has meant Canadian light oil producers have had to sell their product at a discount. But according to Phil Skolnick, the managing director of Canaccord’s global energy research, those days may be nearing an end.

As Jameson Berkow reported on BNN this morning, Skolnick published a note yesterday that built on a Peters & Co. one from last week that noted that the rail loading capacity for crude oil in western Canada could reach one million barrels a day by the end of 2014. That rapidly expanding capacity, Skolnick’s report suggested, could help Canadian light oil producers get their products to the coast – any coast – and out to global markets and global prices. “After the rail build out, export is the next hidden proposition to help unclog bottlenecks and more importantly start to get Canadian oil valued off of global prices,” it said. “If we are correct, we believe this will result in a major revaluation of the Canadian E&P space.” And speaking of major revaluations, Skolnick tapped Canadian Oil Sands (TSE:COS) as the “perfect way” to play this thesis, and bumped its price target up from $21 to $28. That’s a fairly brave call when one considers that the rest of the street is, at best, decidedly neutral on Canadian Oil Sands’s near-term prospects.

In broader market news, as we wait for the correction that everyone, from credible sources like Bank of America’s Michael Hartnett to less credible ones like former CNBC host-turned failed hedge fund manager Ron Insana, think is coming, consider this chart that Richardson GMP & Bloomberg put out recently. While some have suggested that the current market bears a striking resemblance to the pre-1929 crash landscape (hint: it doesn’t), the Richardson/Bloomberg chart draws a comparison to 1987.

Or is it 2007 all over again? Josh Brown unpacked the similarities between the market top seven years ago and the market today on his blog a couple of weeks ago, and it’s an interesting read. “The major glaring similarity between the S&P 500 today and at its last major peak in late 2007 is that, at both moments in time, the PE multiple is 15.2. Not that this necessarily means anything, there have been plenty of other instances throughout history where we’ve had a market trading at or above that level without a crash being the inevitable result – but it’s noteworthy because of the symmetry, I suppose.”

But, he wrote, the differences are more telling than the similarities – specifically the differences in the ratios of debt to total equity. “The credit bubble of the mid-aughts led to all sorts of reckless behavior and the inevitable reckoning when it all came crashing down. Today we see exactly the opposite, the deleveraging cycle is moderating and credit is just now beginning to expand meaningfully. To me, this is the very starkest difference between 2007 and today – corporate cash as a percentage of total assets is now at 30 per cent, in late 2007 it was 20 per cent and everyone was borrowing.”

In other words? Maybe it’s time to stop looking to the past for a way forward in the present, particularly given the unusual conditions – exceptional monetary policy, for example – that have helped propel the market to its current heights.